El Puerto de Liverpool, S.A.B. de C.V. (LIVEPOLC1) Earnings Call Transcript & Summary

Good morning. My name is Danielle, and I will be your conference operator today. [Operator Instructions] This is Liverpool's First Quarter 2024 Earnings Call. [Operator Instructions] Today, we have with us Mr. Enrique Guijosa, Chief Executive Officer; Mr. Gonzalo Gallegos, Chief Financial Officer; Mr. Jose Antonio Diego, Treasury and Investor Relations Director; and Mr. Enrique Grinan, Investor Relations Officer. They will be discussing the company's performance as per the earnings release for the first quarter 2024 issued yesterday. If you did not receive this report, please contact Liverpool's IR department, and they will e-mail it to you or you can download it at the IR website. Please note that this call is for investors and analysts only, and questions from the media will not be taken nor should the call be reported on. Any forward-looking statements made during this earnings call are based on information that is currently available. They are subject to risks and uncertainties that could cause actual results to differ materially from the expectations and assumptions discussed today. This may be due to a variety of factors, including the risks already outlined in El Puerto de Liverpool's most recent annual report. Please refer to the disclaimer in the earnings release for guidance on this matter. I will now turn the call over to Mr. Gonzalo Gallegos.

[Audio Gap] for their confidence and trust in me. Today, I will go through our quarterly results and after that, Enrique and I will be available to answer your questions. I am pleased to share that we have a very strong start of the year with sequential improvements across our key earnings metrics, notably net profit, setting a sound base for the coming quarters. During the first quarter, consolidated revenue increased 9.7% year-on-year. Retail revenue was 8.3% above a year ago and we continue to achieve double-digit growth rates in both our financial services and real estate business units with 22% and 11%, respectively. Same-store sales for Liverpool grew 5.9%, mainly driven by higher traffic. Positive top-line results were achieved despite facing a challenging base period. Our same-store sales during the first quarter of 2023 grew 15%. We continue to see some headwinds in overall consumption since quarter 3, 2023. During the quarter, we used a different promotional strategy for our end of season sale, offering increased discounts throughout the event. Sales results benefited from a seasonal adjustment as Easter fell in March instead of April. On a category basis, Softlines categories continue growing slightly above average, particularly cosmetics and women's clothes. In Hardlines, home and sportswear grew above average, so where we have another strong quarter, achieving its best result in the last 6 quarters, delivering same-store sales of 12.6%. Almost 80% of this increase is explained by higher traffic. These results are due to our continued focus on improving the shopping experience with better merchandise selection, enhanced store maintenance, clear brand signage and our marketing campaigns. For perspective, ANTAD Departmental Stores reported a 7.5% increase in same-store sales during the first quarter. Total ANTAD apparel and footwear categories grew same-stores only 4.2%, while general merchandise increased 7.1%. Regarding retail margin, the previously explained promotional strategy delivered higher margins due to markdown optimization, which coupled with a stronger exchange rate and overall growth in Softlines delivered a gross margin of 33%, an increase of 84 basis points versus last year. Inventory position at the end of the quarter grew just 4.4% year-on-year. In financial services, the top line increased 22% versus a year ago. This reflects a 22.2% increase in our net credit portfolio as we continue to pursue a more aggressive growth in our credit card business. We increased the number of cardholders 10.3% to reach over 7.4 million, a new milestone. On the other hand, Suburbia grew its cardholder base 25.1% to reach 1.7 million. Share of sales with our own credit cards during the first quarter was 47.5% in Liverpool, 1.2 percentage points above a year ago, while in Suburbia was 30.3%, 3 percentage points above a year ago. Revenues from our shopping centers grew 11.5% year-on-year during the first quarter as we were able to increase occupancy by 0.7 percentage points to reach 92.1%, and we continue to see healthy growth rates in the number of visitors. Our consolidated gross margin of 42% was 148 basis points above year ago, mainly due to the improvement in our retail margin as well as a more favorable business segment mix. Operating expenses without bad debt provisions and depreciation grew 8.8% year-on-year. The main factors behind this increase were higher payroll expenses and headcount increases, particularly in digital and technology. We closed Q1 with an NPL ratio of 3.1%. This is 38 basis points above year ago. The NPL ratio for Liverpool was 3%, while Suburbia closed at 6%. This quarter, we posted a bad debt provision of MXN 925 million, more than double versus last year due to overall portfolio growth, NPL increase and a conservative coverage ratio. For perspective, our coverage ratio at the end of the quarter was 9.9% of the gross credit portfolio. The ending balance of the bad debt reserve represented 3.2x the NPL balance. Our Q1 EBITDA of MXN 5.9 billion was 14% above year ago, while our EBITDA margin was 14.4%, 54 basis points above the same period of 2023 due to the strong consolidated gross margin, partially offset by the higher operating expenses. Net profit increased 33.5% year-on-year, achieving MXN 2.9 billion, reflecting the strong operating results, lower financing costs and a more favorable exchange rate. Turning to our digital channel, GMV in the first quarter was 20% above year ago. The digital share for Liverpool was 27%, 200 basis points above the same period last year. Monthly active users for Liverpool Pocket increased 7%. We continue to see strong growth in the marketplace. Our marketplace GMV during the first quarter grew 56% year-on-year and we closed the quarter with 49% more sellers and 50% more SKUs. In the case of Suburbia, our Q1 digital share more than doubled to reach 5.8% of sales. Monthly active users in the Suburbia app increased 21%. We now have a digital kiosk in more than 63% of our stores and we are taking full advantage of our recently implemented fulfillment capabilities for digital orders in all our store base. During the first quarter, digital orders that were delivered in 48 hours or less accounted for 46% of total orders. The share of Click & Collect was 39%, 6.7 percentage points above the same period last year and direct store deliveries were 28% of total home deliveries, 7.5 percentage points above year ago. As we strive to increase the relevance of our app, we continue to strengthen our mobile financial services ecosystem. As we previously communicated, we are now offering cash loans, named Livercash. At the end of the quarter, we closed a portfolio of more than MXN 1.1 billion, 3.7x the balance we had a year ago. Furthermore, we continue testing our deposit and investment offer with a group of our own employees. CapEx for the quarter reached MXN 2.9 billion, 2.6x above year ago. This includes the acquisition of the Altama City Center shopping mall located in Tampico, Tamaulipas. This property represents the 29th mall in our portfolio, contributing to an additional 41,000 square meter GLA, which represent an increase of close to 6% of our total GLA. Excluding this effect, about half of the investment was in our Arco Norte project, while the balance is focused on new stores, remodeling and expansion projects. Cash flow from operations during the quarter was a negative MXN 2.9 million. This was an improvement of MXN 1.3 billion versus the same period of 2023, considering the above-mentioned favorable operating results and credit portfolio requirements. During the first quarter, we completed the sale of our Huehuetoca property to the federal government. This cash benefit was offset by the acquisition of the Altama Shopping Mall. At the end of the quarter, cash on hand was MXN 23.3 billion and our net debt-to-EBITDA ratio is 0.11x. Regarding dividends, during our Stockholders' Annual Meeting, which was held on March 12, an amount equivalent to 20.3% of the full year 2023 net profit equivalent to an amount close to MXN 4 billion was approved to be distributed. The first installment of MXN 1.77 per share will be paid on May 24 and the remainder of MXN 1.18 per share will be paid on October 11. In terms of new stores, we opened 1 new Suburbia store during the quarter at Puerto Vallarta being the first in the city. We also opened 6 new Liverpool Express units to reach a total of 23 of this new format. As I get ready to end my remarks, Enrique, I want to pause and thank you for your countless contributions to the Liverpool brand and team. And with that, let's move to our Q&A.

[Operator Instructions] Our first question comes from Hector Maya.

The first one, if you could please share with us an update about your investments with Arco Norte and how you're coming along with the next phases of the project? And also, if you could share with us your views on your investment in Nordstrom because we understand that the company is potentially going private. So what are you considering to do in this scenario? Or how would you evaluate this investment so far? And if you could also tell us about the learnings that you get from this investment.

So talking about Arco Norte, we're happy with the current state. Overall, the status of the overall project is about 60% advanced. So talking about the construction of the building is very close to 60%. The software implementation is a bit higher than 60%, but it's around that phase and all the equipment, talking about sorter, conveyors, racks and those type of things, they are a bit below 60%. But the overall percentage, I would say, is around 60%. And we are still targeting to start operations in the Softline building around the second quarter of next year. Talking about the Hardlines building that's already up and running and we're currently working on getting more synergies to get more efficiencies out of these new sites. Talking about Nordstrom, we know -- we were not actively participating in the decision of the company. As you know, the board took on an independent team to assess whether or not it makes sense for them to go private. And right now, we are waiting on their findings to see whether or not we get more information. At the moment, we have no intention to either increase or decrease our stock participation. Talking about the learnings, as you know, it's a passive investment, so we don't have a lot of learnings to share at this moment.

But I mean, if the scenario of the company going private comes to have and would you evaluate on doing something else with this investment in the future?

We would have to -- we would certainly analyze all of our options available to determine whether or not we want to do something different. But at the moment, we're not participating in that process.

Our next question comes from Ben Theurer from Barclays.

Hi, just wanted to ask around the performance, obviously, year-to-date, it's been very strong and certainly effects in here. But how do you feel about the consumer behavior? And what is like kind of the read-across you're getting from some of your financial services performance where we've seen a little bit of an uptick on the NPLs on a year-over-year basis, not to be worrisome, but just wanted to understand about the state of the consumer and how you feel about the strength into 2Q here? And what are like your current scenarios for the back half post-election?

We have seen some headwinds in overall consumption since Q3 of last year, particularly in Liverpool. And certainly, the comparison versus last year is not helping. As you know, last quarter, we both said a 15% increase. So the comp base is not very helpful. So we do see some risk as we advance. So the overall sales expectations is to be in line with our guidance to have a full year of around 8% for Liverpool, 13% of Suburbia. So we are happy -- we are more happy with the overall margin performance than with the sales performance. Now moving to financial services. As you remember, before COVID, we were operating in the 4% to 5% range. So we're expecting to have a continuous, if not a low increase in NPLs up to that level. So at the moment, we're not very concerned. We did have a small increase in NPLs, but it's in line with our expectation. So we are not foreseeing a significant risk regarding NPLs and we are still targeting to be around the 3% level for the rest of the year.

Our next question comes from Andrew Ruben from Morgan Stanley.

Hi, I was hoping to dig in a bit more on the labor side. You mentioned in the OpEx commentary, the increase in the minimum wage. I'm curious if you could help us around the proportion of your employees that are minimum wage and also when minimum wages increase, how you see wage gains cascading through higher-paid employees? And then the second follow-up, we saw -- you mentioned a personnel expense control program, primarily in Liverpool and any more color around what that entails would be very helpful?

So our overall labor expense is one of our more important expenses. And what we have seen during the last years is 2 to 3 points of sales increase in overall people expense, because it has a cascade effect. We have a number of people very close to a minimum wage, particularly in Suburbia and in our logistics operation. So these 2 to 3 points increase are not only impacting by -- impacted by the people that are very close to a minimum wage, but it has a bit of a cascade effect on the immediate upper levels because in some scenarios, we could have a person earning a payrolls higher than their supervisor. So we have to accumulate the overall payroll scheme. And as I said, we have seen a few percentage points increase as a percentage of sales. And we're trying to contain that with efficiency programs. So we have a higher band, particularly in our corporate positions, and we are very careful with all the discretionary expenses across the board.

Our next question comes from Melissa Byun.

So Melissa Byun from Bank of America. I just wanted to get a bit of an update on BYD. So how is sell-through relative to plan? What is the attachment of financing you're seeing? And if you could also give us a little bit of an update on how big you think the addressable market is.

Overall, we're happy with the BYD performance. During the last quarter, we sold 576 units. That's actually higher than the sales of the previous 10 months, particularly the month of March, we were surprised by the overall sales performance, we sold 250 units. So we're not -- we provided a guidance of around 1,800 cars for the year. So we believe we will be very close to that figure, but the first quarter results were certainly a nice surprise. And we think that the overall performance of the brand, not only with us, with older distributors will probably be in the 15,000 to 20,000 unit range.

And then when you look at financing, what percentage of the units sold are -- come with some sort of credit overlay. And then what are the terms for that?

It's about 70% of the units are financed and our participation in that credit is relatively -- has been relatively small, and we are trying to close the gap between our credit offer and the competitors to have a significant participation on the financing of those units.

Our next question comes from Luis Willard at GBM.

First of all, first things first, Enrique and Gonzalo, congrats on your first call as CEO and CFO, lots of lucks on your new responsibilities. So I mean, you guys are not new in the company. You already know it better than most of us do. So why don't you share with us, walk us through the vision that you have for the company now under your different responsibility, where do you see the largest opportunities yet going forward? If you feel you're falling short in anything versus your plan or if you feel what areas do you feel you're doing more progress that will be the only question.

Enrique, do you want to take that?

Yes. Luis, thank you for your words. And to tell you the truth, I think that what you can expect at least for the next 12 to 18 months is continuity. As you know, I mean, I have been working with -- very close with Graciano over the past 9 years and he led the company as CEO and was part of the major decisions that we have made in that time frame, including the -- defining the strategy for unified commerce or developing our ecosystem and all the things that you know we're doing in several fronts in all our business units. So quite frankly, at this point in time, and particularly for the second half of 2024 and for the next 12 months in 2025, we're in execution mode. As most of you know, we have huge projects, transformative projects in our supply chain, Gonzalo already explained where we are in the Softline, building a plan, which is the next phase. And that sounds relatively simple in terms of putting together a new warehouse. But the fact of the matter is that it will entail a completely different revamp of the way we distribute our Softline categories. So it's not only, as was the case in Phase 1 of Arco Norte, but it was, quite frankly, just moving from a smaller building to a larger building. In the case of Softline, together with the deployment of the new fulfillment centers, we're going to change entirely, again, how we manage all lines in terms of how -- what's the percentage of merchandise that we centralize, how we receive the Softline at our warehouse, more and more bulk product in terms of -- instead of receiving it previously from a supplier and so on and so forth. So that's a major challenge. We're also in the middle of implementing a new planning assortment and allocation software, that has been a project that has taken a little bit more than what we expected. And again, we are in full execution mode. So that's another big change to the core business or to the heart of the retail division to make sure that we have the state-of-the-art, you know, and incorporating artificial intelligence in order to improve significantly the way we plan our buys, the way we allocated to different places in our supply chain network, the way we also plan our assortment, which is a capability that we today we don't have. So that's another big project. Again, we are in full execution mode. We're also implementing a new order management system, which is also at the heart of the retail business unit. We're expanding the big ticket phase for Liverpool. We already implemented the new software at Suburbia, both for Softlines and big ticket or Hardlines. But in the case of Liverpool, we -- as we speak, we're in the rollout of 30 new stores, we only have 1 store as a pilot, so now we're including another 30 stores. And the idea is to complete the big ticket implementation before the high season around August, September in order to move to the Softline for Liverpool phase, which we plan to be ready by the end of the year to implement it in Q1 2025. We're also implementing a sales and operation plan methodology that we didn't have before to make sure that we have the right integration between the retail plans and the logistics capabilities. That's something that we don't do it like today very successfully. So we're transforming that significantly. So those are like some of the big projects that we have in terms of software. But as you know, it's not only software, it's also changing the work processes. It's also like the training and making sure that the people that are managing those processes are up to speed on what the changes are going to be and accept the change. So those are going to continue as their plan and once again, being reiterative, we're in full execution mode. In the case of financial service, as you know, we're also developing our ecosystem strategy. We continue to grow our personal loan portfolio, that's something we just implemented the capability to do that in our app, but it's going to be very simple for our cardholders to take advantage of these potential personal loans just with a few clicks on the app. We're rolling out also our new features to take deposits and also to allow our cardholders to make investments in a few options in terms of funds. We want to be very careful with the route to make sure that we have the right offer and it's understand very well by our customers. So we're going to be careful with the rollout, but we plan to do that in the balance of the year. So that's a very challenging project as well. So again, just to again reiterate that the idea is to continue what we have been doing. Perhaps the big question that Graciano and myself need to work on is what's going to be the next avenue of growth for the company. So that's one of the questions that we always discuss in our strategic plans, and we need to identify, of course, what's going to be the next blockbuster in terms of our top line and profit growth for the next 5 to 10 years. So that's something that we intend to work together in the next several months. But other than that, I think that you will see more of what you have seen in the past several years.

No, it's super clear, Enrique. Thank you and looking forward for what you find to be the next blockbuster growth going forward.

Any ideas, happy to hear.

We'll do -- I'll share them with you.

We have a last couple of questions from Miguel Ulloa at BBVA. First off, what is your target regarding the size of the credit portfolio to be achieved? And then we can step into the second question.

Well, we expect net loan portfolio growth for the year of around 14%. That is consistent with our guidance. Even though during the first quarter, we certainly had a much better performance with an overall growth of 22%. We are not expecting to continue to that level in the upcoming quarters. So for the year, we are maintaining our guidance of around 14% growth in the loan portfolio. There was another question?

Yes. The second question is on NPLs related to Livercash. Is there anything you can tell us a bit more color on that front?

Well, it's too soon to tell. We started that to take advantage of the overall open to buy space that we have in our credit card business. So not understanding the customers, we saw potential to increase the overall credit. We currently have around MXN 1 billion balance on that. We haven't seen a different behavior on the NPL front. So at the moment, no, we are not -- we don't have a concern regarding NPLs on that front.

Perfect. Thank you. Well, we have no more questions in the queue at this time. So that concludes our question-and-answer session. I would now like to hand the call back over to Gonzalo Gallegos for some closing remarks.

Well, thank you, everyone, for your time and we'll see you next quarter. Have a nice day.

That concludes today's call. You may now disconnect.